ALI-ABA Course of Study Regulation D Offerings and Private Placements

Transcription

1 99 ALI-ABA Course of Study Regulation D Offerings and Private Placements Cosponsored by the Securities Law Committee of the Federal Bar Association March 17-19, 2011 Coronado, California Limitations on the Manner of Offering under Regulation D By Alan J. Berkeley K&L Gates LLP Washington, D.C.

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3 101 LIMITATIONS ON THE MANNER OF OFFERING UNDER REGULATION D Alan J. Berkeley K&L Gates LLP 1 January 2011 I. Introduction: Sales Practices Under Regulation D A. Securities can only be sold if buyers are found. Consequently, a key concern under the private offering exemption is the extent of sales practices permitted. B. With certain exceptions limited to Rule 504 offerings, Rule 502(c) of Regulation D prohibits an issuer or anyone acting on behalf of an issuer from offering or selling securities by any form of general solicitation or general advertising. C. The essential question is what constitutes general solicitation or general advertising. For example, 1) Clearly, an advertisement in the Wall Street Journal offering shares to all comers would be prohibited. 2) Similarly, a letter to every person listed in the Manhattan telephone directory probably would be a general solicitation, notwithstanding the personalization of each communication. Carl W. Schneider, Introduction to Regulation D, 15 Rev. Sec. Reg. 990, 996 (January 13, 1982). 3) A frequently repeated question is: Can you send a soliciting letter to every Rolls Royce owner? II. new. The History of the Prohibition Against General Solicitation and General Advertising The concept of prohibiting general solicitation or general advertising is not A. Regulation D has its roots in Section 4(2) of the Securities Act of 1933, as amended ( 1933 Act ), which exempts from registration transactions by an issuer not involving a public offering. General solicitation and advertising are deemed inconsistent with the notion of a non-public offering. B. As early as 1935, the Commission s General Counsel stated that the manner of offering was one of four critical factors to be considered in 1 With the assistance of Alissa A. Parisi and Ryan J. Severson of K&L Gates lllp, Washington, D.C. DC v19

4 102 determining whether an offer is public or non-public, and that the purpose of the exemption of non-public offerings is largely limited to those cases wherein the issuer desires to consummate a few transactions with particular persons. Securities Act Release No , Fed. Sec. L. Rep. (CCH) at 2912 (January 24, 1935). Additional factors included: (i) the number of offerees and their relationship to each other and the issuer an offering to a given number of persons chosen from the general public on the ground that they are possible purchasers may be a public offering even though an offering to a larger number of persons who are all members of a particular class, membership in which may be determined by the application of some preexisting standard, would be a non-public offering, Id. at 2911; (ii) the number of shares offered; and (iii) the size of the offering. C. Many courts subsequently adopted these factors as a guide for applying the Section 4(2) exemption. See, e.g., Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, (5th Cir. 1971); Garfield v. Strain, 320 F.2d 116, 119 (10th Cir. 1963); Woodward v. Wright, 266 F.2d 108, 115 (10th Cir. 1959); Campbell v. Degenther, 97 F. Supp. 975, 977 (D. Penn. 1951); see also e.g., Securities and Exchange Commission v. Sunbeam Gold Mines Co., 95 F.2d 699, 701 (9th Cir. 1938), where the court stated: [A]n offering of securities to all residents of Chicago or San Francisco, to all existing stockholders of the General Motors Corporation or the American Telephone & Telegraph Company, is no less public, in every realistic sense of the word, than an unrestricted offering to the world at large. Such an offering, though not open to everyone who may choose to apply, is nonetheless public in character, for the means used to select the particular individuals to whom the offering is to be made bear no sensible relation to the purposes for which the selection is made. D. For many years, the SEC emphasized the number of offerees over the other factors, selecting the arbitrary figure of 25 as a test of whether an offer was public. See Hill York, supra, at 688. This numerical boundary also acted to bar general solicitation. E. In Securities and Exchange Commission v. Ralston, Purina Co., 346 U.S. 119 (1953), the Supreme Court explicitly rejected the SEC s claim that a numerical test of 25 offerees should govern. Although finding that an offering of stock to 500 key employees was not exempt, the Court rejected the SEC s contention that the number of offerees was the critical factor. The Court stated:

5 103 We are advised that whatever the special circumstances, the Commission has consistently interpreted the exemption as being inapplicable when a large number of offerees is involved. But the statute would seem to apply to a public offering, whether to few or many. It may well be that offerings to a substantial number of persons would rarely be exempt. Indeed, nothing prevents the Commission, in enforcing the statute, from using some kind of numerical test in deciding when to investigate particular exemption claims. But there is no warrant for superimposing a quantity limit on private offerings as a matter of statutory interpretation.... No particular numbers are prescribed. Anything from two to infinity may serve: perhaps even one.... Id. at 125 and n.11 (citation omitted). F. Instead of relying on the number of individuals involved, the Court stated that application of the exemption should turn on whether the particular class of persons affected needs the protection of the Act or whether such persons are able to fend for themselves. Id. at The chief problem with general solicitation is that it may in fact reach some persons who do need the protection of the 1933 Act because they lack access to the kind of information registration ordinarily provides. See Securities and Exchange Commission v. Murphy, 626 F.2d 633, 647 (9th Cir. 1980); Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 904 (5th Cir. 1977); Securities and Exchange Commission v. Continental Tobacco Co., 463 F.2d 137, 158 (5th Cir. 1972); Lively v. Hirschfield, 440 F.2d 631, 633 (10th Cir. 1971); Gilligan, Will & Co. v. Securities and Exchange Commission, 267 F.2d 461, 466 (2d Cir.), cert. den., 361 U.S. 896 (1959). G. In 1974, the SEC adopted Rule 146 as a nonexclusive means of establishing compliance with Section 4(2). The rule permitted an unlimited number of offerees, but limited the number of purchasers and the manner of offering. General solicitation and general advertising were prohibited and issuers were required to pre-screen offerees and evaluate their financial condition and sophistication. H. In 1982, Rule 146(c) was superseded by Regulation D, and in particular by Rules and 506 under Regulation D. 1) With certain limited exceptions, the new rule continues to bar general solicitation and general advertising while shedding no new light on the meaning of these terms. 2) Regulation D also dispenses with the earlier requirement to prescreen offerees.